Why Galena Biopharma, Inc. Shares Tumbled

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Galena Biopharma (NASDAQ: GALE  ) , a biopharmaceutical company focused on developing immunotherapeutic options to treat cancer, fell as much as 21% after reporting its quarterly results after the closing bell last night and disclosing an investigation by the Securities and Exchange Commission.

So what: For the quarter, Galena reported net revenue of $1.3 million, driven by sales of newly acquired FDA-approved drug Abstral for breakthrough cancer pain, and an operating loss of $12.4 million due to higher costs from ongoing clinical studies. In the year-ago quarter, Galena produced no revenue and delivered a smaller operating loss of just $5.6 million. Net loss, however, swelled due to $38.9 million in non-cash charges to $48.5 million, causing Galena to widely miss Wall Street's EPS estimates. On the positive side, though, Galena boosted its 2014 forecast for Abstral sales to a new range of $11 million-$15 million from its previous projections of $8 million-$12 million.

What really has investors up in arms is an admission on page 37 of its annual 10-K filing that "[i]n February 2014we learned that the SEC is investigating certain matters relating to our company and an outside investor-relations firm that we retained in 2013. We have been in contact with the SEC staff through our counsel and are cooperating with the investigation." Concerns have been raised in recent weeks that Galena may have hired a stock promoter to boost the value of its shares (see here and here, for example). Apparently, this has created enough real buzz that the SEC is looking more closely into whether that was the case.

Now what: There are few biotech companies that are as polarizing as Galena Biopharma -- you generally either love it or hate it. This SEC investigation is clearly a blow to a company whose earnings report otherwise signaled -- with the exception of one-time non-cash charges -- that it may be headed in the right direction. Keep in mind, of course, that SEC investigations sometimes turn up nothing or can lead to nothing more than a slap on the wrist. On other occasions, they may lead to hefty fines, which Galena may have difficulty absorbing. There are a lot of possible outcomes here, and given that uncertainty surrounding this investigation, you're probably best off sticking to the sidelines until we have better clarity.

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